MCRetire 1.2

by CI Staff

MCRetire is a Monte Carlo simulation program by Efficient Solutions Inc. that helps users determine if they have adequate assets to meet their retirement needs. Unlike most retirement calculators, MCRetire takes into account fluctuations in return on investment (ROI) during the retirement period and calculates the probability of success.

To be more specific, a Monte Carlo simulation uses random variables to approximate the probability of certain outcomes, rather than naively assuming a constant growth rate. By also allowing users to adjust for tax, inflation and obstacles, MCRetire provides users with a more realistic and potentially more accurate representation of their retirement situation.

The easiest way to learn how to use MCRetire is to go to the Help tab or press F1 to open the user manual. The manual does a decent job explaining how to use the program and how it works. Users should also pay close attention to the overview, which states that even a high probability does not guarantee success.

In the Inputs window of MCRetire, users enter how much they expect to have or already have in their retirement account and how much they would like to withdraw at the end of each month. The Parameters window is where users enter their expected annualized portfolio return, annualized portfolio standard deviation and time horizon.

Selecting the Details button will allow users to enter data such as annualized inflation, income tax rate, portfolio composition, portfolio expenses and more. Trial users will notice that the program’s functionality is reduced to a maximum 15-year time horizon and most rates can only be a multiple of 5% per year. For instance, as a trial user, one must choose between 0%, 5%, 10% or some other multiple of 5% for inflation, tax, portfolio expenses, etc. The full version allows users much more flexibility in this respect.

After running the simulation, the program will display the probability of success as a percentage. Increasing the principal in a retirement account or decreasing the amount withdrawn monthly will raise the probability of success. The probability of success merely indicates how likely it is that the user will have sufficient funds in his or her retirement account to meet the monthly withdrawal goals over the indicated time horizon.

For instance, assume one would like to withdraw $3,000 every month for the next 15 years and MCRetire calculates an 84% probability of success. This means that there is an 84% chance he or she will not run out of money within those 15 years, assuming the parameters remain constant. Altering the parameters will also make a drastic difference in results, but they should not be altered unless they no longer reflect the user's long-term position, such as if tax rates change.

Although MCRetire is a powerful tool, it still depends on the reliability of the user’s inputs and makes some arguably erroneous assumptions. For more details, refer to the aforementioned user manual.